Freddie Mac Investigates Self Over Lobby Campaign

Freddie Mac Corporate Office are seen Sunday, July 13, 2008 in McLean, Va. The U.S. Treasury and the Federal Reserve are announcing steps to shore up mortgage giants Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac either hold or back $5.3 trillion of mortgage debt. That's about half the outstanding mortgages in the United States. (AP Photo/Pablo Martinez Monsivais)

By AP&nbsp|&nbsp

Updated: Mon 6:27 AM, Feb 23, 2009

WASHINGTON -- Lawyers hired by mortgage finance giant Freddie Mac are quietly investigating the firm's own $2 million lobbying campaign, The Associated Press has learned. The lobbying effort helped quash proposed new regulations on the company before the housing market collapsed.

It was not immediately clear how much Freddie Mac is spending to investigate its own conduct or whether it is spending any federal bailout money on the internal probe. The firm was placed under U.S. government control due to its massive investment losses.

One of Washington's leading law firms, Covington & Burling LLP, has spent more than a month interviewing current and former Freddie Mac employees and executives, according to three people familiar with the matter. These people spoke on condition of anonymity because they fear reprisals if they were identified. The inquiry is led by former Justice Department prosecutor Stephen Anthony, who specializes in corporate internal investigations.

Freddie Mac board chairman John Koskinen confirmed for the AP that an inquiry is under way but declined to comment further. Anthony did not return phone calls and e-mails seeking comment. Corinne Russell, spokeswoman for the federal office that regulates Freddie Mac, declined to comment.

The internal investigation is happening even as the Obama administration provides $200 billion more in government assistance to Freddie Mac and its larger sister company, Fannie Mae. The two government-sponsored enterprises are the largest providers of home mortgages in America. Freddie Mac's activities fall under oversight of the new Federal Housing Finance Agency, which describes itself as "a world-class, empowered regulator with all of the authorities necessary to oversee vital components of our country's secondary mortgage markets."

The inquiry inside Freddie Mac follows stories by the AP about the company secretly hiring Republican consulting firm DCI Group of Washington to stop a proposal in the Senate in 2005 sponsored by Sen. Chuck Hagel, R-Neb. The legislation would have forced Freddie Mac and Fannie Mae to sell hundreds of billions of dollars worth of assets from their portfolios of mortgages and mortgage-backed securities. At the time, the portfolios were highly lucrative but their value plunged when the housing market collapsed.

The DCI Group did not file lobbying reports describing the work it was performing. At the time, Freddie Mac executives who knew about the initiative referred to it among themselves as "the stealth lobbying campaign," according to people familiar with the matter. DCI Group spokesman Geoffrey M. Basye says the firm practiced the highest ethical standards and coordinated with Freddie Mac's lawyers to ensure uncompromising compliance with all applicable federal and state laws and regulations.

The people familiar with the internal inquiry told the AP that Anthony has interviewed current and former Freddie Mac employees about three issues raised by the AP stories:

-An accounting of the work done for the $2 million in payments to the DCI Group. It targeted 17 Republican senators in 13 states working to defeat Hagel's regulatory legislation by convincing prominent constituents and financial contributors the bill would hurt the housing boom. The measure was never brought to a vote and died.

-An accounting of six-figure payments to 52 outside lobbying firms and political consultants in 2006, including details about what work, if any, the consultants performed for the money paid to their firms. The consultants included former House Speaker Newt Gingrich and ex-Sen. Alfonse D'Amato. The payments to the 52 consultants amounted to $11.7 million. D'Amato's firm, which was paid $240,000, declined to comment. Gingrich's firm was paid $300,000 for strategic advice on a number of issues.

-An accounting of personal use by Freddie Mac executives of company-paid tickets and a company-leased skybox at the Verizon Center. Freddie Mac executive Hollis McLoughlin, who oversaw the $2 million campaign by DCI, was photographed by the AP in Freddie Mac's leased skybox four months ago at the season home opener of the Washington Capitals hockey team.

Covington & Burling has represented Freddie Mac in other controversies, including its defense against charges it made illegal campaign contributions. Freddie Mac settled the matter by paying a record $3.8 million fine imposed by the Federal Election Commission in 2006. Separately, Covington & Burling represented Freddie Mac in roughly 20 lawsuits alleging the company fraudulently inflated the price of its stock from 1999-2002. All have been settled.

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